The childcare market suffered a significant blow last month when prime minister Gordon Brown announced the tax and national insurance (NI) breaks on childcare vouchers would be phased out from April 2011. Beyond that date, employees taking up childcare vouchers for the first time will no longer benefit from tax and NI relief. Existing recipients of the vouchers will continue to get the relief until April 2015. Full details of the change will be contained in this month’s pre-Budget report.

The money the government will save by withdrawing these tax and NI breaks will go towards offering a limited amount of free childcare for 250,000 two-year-olds each week by 2015-2016.

The Childcare Costs Survey 2009, published by the Daycare Trust in January, showed the typical cost of a full-time nursery place for a child under two is now £167 a week. This compares with an average weekly wage of £479. The research also showed 69% of parents, recorded by Family Information Services, report a lack of childcare in their area.

These are two reasons why childcare provision is a prized benefit, despite being relevant to only part of the workforce.

Ken Lawrie, head of reward at Easyjet, which provides childcare vouchers through its voluntary benefits plan, says it has received good feedback from the 2.8% of staff who have taken up the perk. “Before we introduced the vouchers, we had many enquiries, not only from those eligible, but from others who thought we should provide them.”

Employers that want to offer childcare benefits have a number of options available, Employers that want to offer childcare benefits have a number of options available, with a variety of price tags.

Employer-provided childcare options available:

Workplace nurseries
On-site workplace nurseries tend to be the preserve of large, often public sector, organisations with a high proportion of female staff, such as NHS trusts, universities and local authorities. Although these offer complete tax and NI exemption on childcare costs, they are only really an option for employers with deep pockets.

How deep will depend on factors such as the number of children to be accommodated, and whether premises have to be built from scratch. Typical start-up costs for a 50-place nursery may be about £500,000.

Kidsunlimited, which helps organisations design and project-manage new-build nurseries and conversions, says the cost of fitting out an empty shell scheme to its standard specification is about £80 per square foot, while a full new-build usually costs around £135 per square foot.

But Purnima Tanuku, chief executive of the National Day Nurseries Association, whose remit includes encouraging and developing childcare provision, is far from enthusiastic about employers setting up workplace nurseries. “They must look at all its options and consider if they really are suitably qualified to open on-site childcare, otherwise they may find costs quickly run over budget and a lot of management time has to be dedicated.”

Like any other nursery, workplace nurseries must be inspected by Ofsted (or the equivalent devolved authority) and meet its many and varied requirements. This is not a game for amateurs, which is why many employers with on-site nurseries outsource the management to experienced providers.

Jointly-run nurseries

Jointly running a nursery or play scheme with other employers, voluntary bodies or a local authority enables an employer to offer its ‘own’ childcare facility while sharing the cost and management burden. The same tax and NIC exemptions are available as for an on-site workplace nursery, as long as premises are made available by one or more of the participants and the employer is seriously involved in financing and managing the facility. Simply buying places from a commercial nursery is not enough.

A potential drawback of both on-site and jointly-run nurseries is that they force employees to take subsidised childcare provision at or near their workplace. Alison Chalmers, director at KiddiVouchers, says: “While parents value the convenience and cost savings provided by on-site nurseries, sometimes they may prefer to be able to use a different childcare provider of their choice. For example, they may prefer to use a nursery that is nearer their home.”

On-site and jointly-run nurseries may not also provide a variety of childcare, for example, after-school cover for older children, to satisfy all parents in a workforce. Directly-contracted childcare places With childcare provision, what you gain on flexibility, you lose on tax relief. This is the case with directly-contracted childcare, whereby an employer contracts directly with a childcare provider, whether a nursery, cr™che, pre- or after-school club, or other approved provider, on behalf of employees. The big advantage here is staff should end up with exactly the type of childcare they require, where they need it. “Employers that want to support employees often find contracting in with existing local nurseries is a real solution,” says Tanuku. “This also means parents are given choice, while employers can continue to benefit from supporting staff and tax savings.”

Although there is no restriction on the amount of childcare provided in this way, only the first £55 a week or £243 a month is tax and NI exempt.

Directly-contracted childcare can be offered on top of employees’ normal pay or through a salary sacrifice scheme. If the salary sacrifice route is chosen, the only cost to the employer is the staff time needed to manage the scheme. As such, this can be the cheapest form of childcare provision and can particularly suit small employers with a handful of staff.

Emergency childcare

Employers can also provide directly-contracted childcare on an emergency basis. For example, if an employer pays to keep a place free in a local nursery so it can be used by staff if their own childcare arrangements fail, the benefit is free of tax and NICs, as long as the cost across all eligible employees does not exceed £55 a week or £243 a month each.

Alternatively, employers can simply provide staff with access to a database of contact details for alternative care arrangements.

Childcare vouchers

For employers that blanch at the thought of dealing with lots of providers, one alternative, for the time being at least, is to offer childcare vouchers and let staff sort it out for themselves. Until 2011 or 2015 (depending on whether employers implement a scheme before 2011), the first £55 a week or £243 a month is exempt from tax and NI, as long as it is used for qualifying childcare.

The attraction of vouchers is their flexibility. They can be used for a wide range of approved childcare, can be paid to both parents without losing the tax and NI benefits, and, because they are not time-limited, they can be saved up and spent when they are most needed, for example in school holidays. One downside is that vouchers may not benefit parents receiving working tax credits.

The cost of providing vouchers can vary greatly. An employer can set up its own voucher scheme or buy off the shelf from a voucher provider and pay anything from 1.5% to 9% of the voucher’s face value for administration. But even employers paying top whack should find administration costs are covered by their NI savings, which could be up to £373 a year per employee.

Chalmers says prices are currently being driven down as competition in the voucher market hots up. “Any employer paying more than 3% would be well advised to shop around or to ask their existing provider for a fee review,” she says.

But Dave Casson, sales manager at Kidsunlimited, sees things a little differently. “Very low administration fees may initially appear to save the employer more on NI, but can often affect the quality of the communication material produced and therefore employee engagement in the scheme, ultimately proving to be false economy,” he says.

As ever, the message seems to be: by all means shop around for the best price, but employers must be sure what they are getting for their money

Case Study: Abbey banks on chilcare vouchers

Feedback from staff at Abbey suggests they greatly value the childcare vouchers that are an integral part of the bank’s benefits package.

Ian Cunningham, reward consultant at Abbey, says: “Employees are in favour of this benefit as it not only saves them income tax and NI contributions, but it also provides them with a convenient system when managing payments to childcare providers.”

The bank is also aware that voucher schemes are of most benefit to employees who have structured childcare arrangements in place.

Therefore, for those who do not take up the perk, Abbey offers access to an emergency childcare helpline through benefit provider My Family Care. This enables staff to gain immediate access to accredited carers, as well as a range of specialist support services.

Case Study: Powerful childcare provision at E.On

Power company E.On views the provision of childcare vouchers through its flexible benefits plan almost as a moral obligation.

Ant Donaldson, senior specialist in employee benefits, says: “I think it would be remiss of us as a major employer not to help people access savings available under the childcare voucher scheme.”

By making it easier for parents to return to work, the childcare vouchers help E.On maximise the diversity of its workforce. “This helps our business by increasing the range of views our colleagues bring to their work and enabling us to empathise with our customers more fully.”

Almost 800 of E.On’s 17,500 staff have taken up the vouchers, provided by Accor Services. This is almost double the number using the benefit two or three years ago, thanks to word-of-mouth and promotion by the company. But Donaldson says more work is needed to promote the vouchers, particularly to fathers and parents of school-age children. “The savings can be substantial, especially if both partners can access salary sacrificed vouchers,” he explains.